State Tax refund should be taxable

[THKARAS]

I have a 1099-G reporting a state income tax refund from tax year 2021, a year in which I itemized deductions. By the rules stated in Turbo Tax and by the IRS, this should be taxable. However, when I enter the 1099-G into my Turbo Tax for 2022 , the program states that this is not taxable and does not enter a 1040 Line 1 for it. It does not even show a Line 1 category in which I could enter the refund amount manually. What can I do?

[MayaD]

If all three of the following are true, your refund counts as taxable income:

• You itemized deductions last year, instead of taking the standard deduction
• You claimed state and local income taxes (not general sales taxes)
• Claiming the deduction helped you increase your federal refund or lower your tax bill

 It depends on how much the deduction affected your refund or tax bill. Just answer a few simple questions about last year’s refund, and we’ll calculate the taxable amount for you.

Do I need to report the state or local refund I got last year? Is it taxable?

[THKARAS]

Yes, I itemized and it was income tax. I do not know why the deduction would not have reduced my Federal tax. I do see, however, that the Turbotax State and Local Income Tax Refund Worksheet line 11 declares the whole refund amount to be a "Total Recovery exclusion," and then list zero in lines 12 and 14 "Total taxable refund".

Is it possible that taking that deduction did not in fact result in any reduction of my Federal tax? Was it not an allowable deduction? Was there perhaps a maximum allowable tax deduction for 2021?

[KrisD15 · Accepted solution]

No, I think the issue is that the refund of the deduction this year would not have increased your tax liability last year. 

If your State and Local Tax (SALT) was limited to 10,000 the year you itemized, but you had paid more, the refund would not be taxable if the refund amount was as much or less than the tax you were not allowed to take. 

So YES, the deduction reduced your tax liability last tax year, but NO, you don't need to claim it as income this tax year. 

[Marie82]

It was just reported on Channel 3, Sacramento, that if you itemized deductions in 2021 but only used the sales tax rather than state income tax in that deduction, the payment is not taxable. If you used the standard deduction, the payment is not taxable.

[SteamTrain]

Two examples for the refund not being included, or partially included...when itemizing the prior year and using State&Local income taxes paid as a deduction the prior year.  (not using Sales Taxes)

1) State refund from 2021 taxes was $1,500.   State&Local income taxes entered as a deduction for 2021 was $13,000.  Since SALT limit is $10,000, then $3,000 of it could not be used as a deduction last year....so that unused $3,000 negates all of the $1,500 refund ...i.e. it is not used for Federal income for 2022.

2)  State refund from 2021 taxes was $1,500.   State&Local income taxes entered as a deduction for 2021 was $11,000.  Since SALT limit is $10,000, then $1,000 of it could not be used as a deduction last year....so that unused $1,000 negates $1,000 the $1,500 state refund ..leaving $500 that will be used as Federal income for 2022.

[Marie82]

The IRS has issued a ruling that the MCTR is NOT taxable for California residents. And of course FTB already has issued a ruling it is not taxable on the California return.

[Boadafamily]

How do you treat a 1099-G that is non taxable as the $10000 SALT limitation is still achieved after the refund is credited to the prior year. It doesn't  seem like TurboTax is doing this correctly

[KrisD15]

The TurboTax program DOES adjust the refund as being non-taxable if the amount of taxes claimed on the previous year's Schedule A was limited because of the State And Local Tax (SALT) limit and if the state tax allowed to be claimed would still have been 10,000 (or more) with the refund subtracted. 

If you use the program to make that calculation, there is a screen where you list the state tax you paid and what you were allowed to claim on that year's Schedule A. 

If the difference is as much or less than the refund, click Continue and the program will report that the refund is non-taxed. 

In my test return, I reported a 100 refund, state tax paid as 11,000 and state tax claimed 10,000 (because of the SALT limit). The 100 refund was considered not taxable.